Strategic Road Map: Getting & Spending Guyana’s Petroleum Revenues

Introduction

Today’s column commences my first systematic delineation of a Strategic Road Map for getting and spending Guyana’s expected Government Take from the petroleum sector. This task will constitute the final Volume (4) of an extended series of columns, which commenced December 27, 2015. That first column was entitled: El Dorado at Last! Prospects for Guyana in a time of oil/gas production and export. As a lead-in to those considerations, I deliberately set out to locate Guyana’s coming petroleum sector within the broader framework of its major extractive industries.

In accomplishing this task, the first Volume of columns appraised Guyana’s mineral sector (gold and bauxite), during the period December 27, 2015 to February 28, 2016. The second Volume similarly appraised the forest-subsector, during the period March 6, 2016 to August 28, 2016. And, the just completed third Volume, has appraised Guyana’s coming petroleum sector over the extended period September 4, 2016 to last week, January 20, 2019.

Today’s column provides a summary outline of the Strategic Road Map’s design. It reveals the principal guideposts. Here, I follow the typical pattern of strategic mapping. This means I avoid unnecessary details, minutiae, or a “to-do list.” Where important for accuracy, I shall refer readers to already completed columns on the matters under consideration. Consequently, the Strategic Road Map remains rooted in the columns covered in Volume 3. Further, I advise readers that this is my first and only attempt to delineate, systematically, a proposal for getting and spending Guyana’s petroleum revenues.

Strategic Road Map: Petroleum Revenues

I consider Government Take from petroleum revenues as a function of six principal variables, namely: 1) the fiscal rules in the Production Sharing Agreement (PSA); 2) Guyana’s geological features, petroleum finds, and estimated reserves (quantity and quality); the projected Daily Rate of Production (DROP); 3) petroleum prices; 4) existential risks linked to commercializing production; 5) the Contractor’s capabilities; and 6) estimated cost-price relations. These six features are briefly described below, and their elaboration forms the substance of coming columns.

First, the PSA’s fiscal rules indicate the sources of Government revenue yield, the permitted exemptions, and the potential value. Second, the finds indicate the quantity, quality and trend in petroleum reserves available for exploitation. Together these considerations allow for an estimation of the DROP.

Third, there are severe risks facing petroleum projects. Some of these I consider existential, in the sense that they determine whether a petroleum project is started or becomes “stranded assets.” Fourth, the dollar value of the DROP principally depends on ruling market prices for the petroleum products Guyana is expected to produce, mainly crude oil and gas.

Fifth, under the PSA, Guyana (Host country) is the owner of the petroleum resources. The Contractor (Exxon and its partners (Nexen and Hess)) is the international oil company (IOC) directly responsible at this stage for production and sale of expected petroleum products. The Contractor’s efficiency and capabilities are therefore central to actual outcomes, as Guyana does not possess the capital, know-how, or skills to produce and export petroleum on the required scale.

The above indicates five of the guideposts for “getting” Guyana’s petroleum revenues. The sixth (and final) guidepost is the expected profitability of Guyana’s petroleum project. This in large measure is expressed as a function of the cost-price relation for Guyana’s petroleum output.

Strategic Road Map: Spending Government’s Take

Having determined a representative ratio of Government Take to revenue yield for the Road Map, the major items determining the Spending of that Government Take are: 1) the yield, or ratio/ percentage employed in estimating Government Take; 2) priorities already indicated by the Government for its spending; 3) the macroeconomic challenges all Government Spending faces 4); the special downstream value-added issue of the feasibility of a national oil refinery; and, finally 5) my suggested foundational priorities.

These five guideposts are briefly described below; they form the substance of future columns.

First, different estimates of Guyana’s projected Government’s Take from its PSA are identified, and the representative ratio/percentage is indicated. Second, government priorities for the spending of its Take are consolidated and presented as obvious legitimate priorities for spending this Take. Third, based on experiences from a wide range of countries, anticipated macroeconomic challenges facing Government spending of what may be termed as “windfall revenues” are identified. 

Fourth, widely debated spending priorities centered on value-added downstream government investments are engaged. These principally refer to a national oil refinery, indicating the construction of mini-refineries, and natural gas production.

Finally, I detail my two foundational spending essentials. These are: 1) based on my judgement that, while Guyana’s petroleum reserves potential is formidable and will propel it into the elite top group of global producers (both per person and absolutely) in terms of its DROP, Guyana’s renewable energy resources are, potentially, just as formidable. Government’s exploration of this makes development/economic/business sense, as much as its carbon-based energy resources under consideration. A specialized Statutory Government Body or a Ministry of Renewal Energy (MORE) is proposed.

Alongside this, I call for spending Government Take, to make cash transfers (conditional and unconditional) to Guyanese households. This has become known as the Buxton Proposal, which I publicly made last August at a Symposium held in commemoration of the 2018 Emancipation of Slavery. This proposal had identified a target cash transfer of G$1,000,000 or US$5,000 per household, at the full ramp-up of the DROP.

Both these investments represent, strategically, the best economic/developmental way for spending Guyana’s Government Take. I argue, they provide a transformational outcome for Guyana’s economy, which is the goal of the Road Map. 

Prevailing public mischief reflects in some measure a lack of basic information on the state of research findings in this field. Today, in Guyana, ideas of the 1980s, and 1990s, seem to be ruling local debates and their echo chambers in some printed media. As I go forward, I shall offer readers an updated appraisal of global research findings on cash transfers (and universal basic income schemes), which development agencies like the World Bank, the Inter-American Development Bank (IDB), UNICEF, the UK Department for International Development (DFID), and varied European Union Development programmes now operate.

Conclusion

Next week, I shall provide a schematic representation of the elements of the Road Map indicated. Afterwards, I proceed to discuss the “finds” and estimate Guyana’s oil and gas resources.